Growth of exports from China has been dropping relentlessly, for years. Now this “growth” has actually turned negative. In September, exports were down 3.7% from a year earlier, the “inevitable fallout from China’s unsustainable and poorly executed credit splurge,” as Thomson Reuters’ Alpha Now puts it. Most of these exports are manufactured goods that are shipped by container to the rest of the world.

And imports into China – a mix of bulk and containerized freight – have been plunging: down 20.4% in September from a year earlier, after at a 13.8% drop in August.

That kind of decline in shipping volume comes as a nasty surprise for the shipping industry that has been betting on boundless increases, and has been adding capacity in quantum leaps.

Back in early 2011, when Maersk, the world’s largest container carrier, ordered 10 ultra-large container ships capable of carrying 18,000 twenty-foot-equivalent container units (TEU), it expected demand for containers to grow by 5% to 8% every year. Maersk has since been whittling down its forecast to 2% to 4% annually. And as things stand, that may be a stretch. Yet…

“The scramble to order so-called ultra-large container vessels had turned into a stampede,” as 36 ships rated at 18,000 to 20,000 TEU are expected to be delivered in 2015, 12 in 2016, 22 in 2017, and 22 in 2018, the JOC reported. By 2018, nine carriers will operate ships of this size. Overcapacity is expected to hit 10% by 2016, the worst since the Financial Crisis – and maybe worse.

Unperturbed, Maersk signed a $1.8-billion order in June for 11 ships with a capacity of 19,630 TEU, on top of its orders for a number of smaller ships.

As container shipping capacity leaps to the next level, shipping volume of containerized freight is languishing in a world where economic growth is getting bogged down. As a result, rates for shipping containerized freight have been hit hard. And the China Containerized Freight Index (CCFI), which tracks contract rates and spot rates from China to the rest of the world, has collapsed.

The CCFI, operated by the Shanghai Shipping Exchange and sponsored by the Chinese Ministry of Communications, is not being beautified in the manner that more publicly visible statistics, such as GDP growth, are subject to. It is allowed to get very ugly. And it got very ugly.

The index plunged below 800 in early July for the first time in its history (it was set at 1,000 in 1998). It then recovered to a smidgen above 800, but now re-collapsed to even lower levels. The latest weekly reading dropped another 2.3% from the prior week to 764.84, a new all-time low:

The CCFI is now nearly 30% below where it had been in February and 23% below where it had been 17 years ago when it was set at 1,000.

Of the 14 shipping routes in the index, only three saw week-over-week rate increases: to Japan (+1.4%), Korea (+4.9%), and West/East Africa (+4.2%). The 11 remaining routes saw drops, including to the US East Coast (-2.0%), the US West Coast (-2.2%), Northern Europe (-3.2%), South Africa (-3.9%), South America (-5.0%), Taiwan (-5.3%), and the Mediterranean (-10.8%).

There’s no relief in sight. At JOC’s TPM Asia Conference in Shenzhen on Thursday, former CEO of container carrier NOL and now McKinsey consultant Rob Widdows told participants that contract freight rates on trans-Pacific routes are heading even lower – “probably by a lot.”

“The peaking effect associated with large ships hasn’t happened yet,” he said. “The amount of capacity coming is enormous and will play out over the next couple of years, and the pressure these carriers will be under from a profitability standpoint will be significant.”

Overcapacity wouldn’t be much of a problem if the global economy, awash with liquidity and nearly free money orchestrated by central banks around the world, had grown to the extent envisioned over the years by executives in the shipping industry. Turns out ZIRP and QE didn’t do much for the real economy. But they did get executives drunk with optimism and handed them cheap money to chase after their drunken visions. That chase itself propped up GDP, including by investing in overcapacity.

Now the bitter taste of reality is setting in: shipping is a measure of the real economy, and that economy hasn’t been doing very well, apparently.

A bit of fun just to lighten the mood… what is a permabull masquerading as an “analyst” going to do when asked what’s the relation between this massacre (carnage is not a strong enough word anymore) and the latest GDP numbers emanating from Beijing?

1) Admit the Chinese government has been lying out of its teeth for years now.
2) Admit retail sales worldwide may not be doing so well and that’s not a good signal.
3) Blame “tensions in the Middle East”.
4) Blame the Martians.
5) Go on a long and mostly meaningless rant about how China “doesn’t matter” thirty seconds after praising her GDP growth figures to the Moon and back.
6) Ignore the question and instead start pitching Glencore as a “must buy”.

Excellent reporting and commentary. Let me know if I can be of any help in getting you information on China. Chris Oliver Editor at the SCMP

amerumix

Oct 19, 2015 at 11:55 am

Thank you Wolf, great reporting. We are noticing lower LTC rates to Peru from China. Peru’s economy seems to be slowing as their exports to China seem to be declining.

Dave Mac

Oct 19, 2015 at 12:40 pm

Global recession is on the way…

Julian the Apostate

Oct 19, 2015 at 1:05 pm

There we go again: clouding the issue with the facts. Bought groceries at Sam’s Club this morning the drop in commodity prices has hit the cereal aisle. Cereal Wars:Tony the Tiger Strikes Back! Freight is definitely slowing. I expect a very bleak January. So how was your day?

michael

Oct 19, 2015 at 3:13 pm

Yawn…….I am waiting to see a recession in housing and healthcare

interesting

Oct 19, 2015 at 5:15 pm

i’d been avoiding opening my quarterly insurance bill and then i saw your reply and thought lets see how much it went up this quarter.

to my surprise only 2.8% from last quarter…. that will be 11% for the year…..last time i had an 11% raise was 1983……it must be nice to have a captive customer that must, by law, buy your product at whatever price you set. And my plan was grandfathered in so it’s not like i got options to change it.

NOTaREALmerican

Oct 19, 2015 at 4:17 pm

Well, just like the last “great recession”, it ain’t really a recession unless the top 10% feel the pain.

I doubt they’ll feel this recession either.

rich

Oct 19, 2015 at 4:28 pm

The collapse in China’s freight indexes, coupled with its growth in electricity demand at the slowest pace in 30 years, and that 6.9% GDP figure seems just a bit suspect.

Bruce Adlam

Oct 19, 2015 at 5:07 pm

Hi wolf good reporting We live in such a pc world we can’t say what we really think for fair of being labeled racist. Sexist or any other thing they can think of but all it’s doing is fudging the truth and promoting lieing.
Eg we all know that China is lying and yet the world acts like there is nothing wrong For some reason it need someone with athority for it to have legs as in the VW case .The PC world promotes it’s ok to lie so long as you don’t get caught .I wonder how much lying is going on that we don’t no about.

I guess the fact that there is lying going on that we don’t know about is a known unknown.
I wonder what the unknown unknowns are.
(It’s kind of funny- after all the grief from idiot Rumsfeld- these expressions may be his only lasting contribution)

Debravity

Oct 19, 2015 at 6:32 pm

All that excess capacity? Surely they must have been able to see this coming a little more accurately than their investments would speak. Maybe the big shipping companies are about to start offering refugees from the Middle East FREE 30 day ‘one way cruises’ at the expense of Western tax-payers?

economicminor

Oct 19, 2015 at 8:07 pm

“Surely they must have been able to see this coming”

No, if you say something negative or don’t conform to the crowd, it is ostracization time.

This is a world of *Positive Thinking*! Negative thinking gets you fired. Follow the FED. Regurgitate the Party Line… What ever you do, do not think for yourself. That is an absolutely positive way to get trammeled.

Mr Reality

Oct 19, 2015 at 8:16 pm

Something tells me the hangover from this will last for years.

Sceptic

Oct 20, 2015 at 11:56 am

If our central planners were not such incompetent, greedy ninnies, they would have realized that when they moved the manufacturing jobs from the uSA overseas, they destroyed the American middle class, the powerhouse for the consumer economy. The new manufacturers did not create a middle class to consume what they were producing, they simply created a slave class. The ninnies thought that labor was too expensive in the uSA so they destroyed it and along with it the global economy.
In the uSA, every job in manufacturing created 5 in the service sector.

Red Flag

Oct 20, 2015 at 6:50 pm

@Skeptic,
I think they THOUGHT they knew what they were doing. Two agendas: 1) make more $ with cheaper labor 2)break the US middle class as per Agenda 21. The real world result? They lost their own tax revenues and now that the US govt is 50% of the job economy, they have to actually find the $ to pay their own people. The wars aren’t going so well, and now it looks like BRICS will launch their own solution to the disaster $. So they are truly in a muddle. What to do now? The elites are blowing and huffing and trying to out-bluster everyone and it only works with little Malaysia and Vietnam. TPP won’t save the day, either. China, 5,000 years of empire, will figure out what to do via the trade window. The US? Twisting in a gale force wind.

From down here is Joe Public land: why would I shop at China-Mart? Their tools are junk and break after a few uses. The other stuff is cheaper at Aldi, Dollar General, and the Farmer’s Market. In fact, my Farmer’s Market is closer to my house than the China Mart.
“China, grow up and start producing value.”
Buried in this, many will understand, is the ethical factor. When the businessmen decide tainted dog food is OK, tainted toothpaste is OK, etc then you have a culture which cannot be long term successful in business. The risk is too high to the customer. Sadly, many USA companies have gone this way also. The governments now mandate profits for many (Internet access, insurance, government contractors, solyndra) but the public, innovative Americans will eventually find a way to restore economic freedom. Will that collapse the market? Most likely as the market is a socialized beast right now.